The speed with which most academic research is obsoleted, especially in the social and behavioral sciences, is something of a punchline. It is deserved to some extent, but there are a number of "classics" in any field which stand the test of time. In political science, McCubbins and Schwartz produced their seminal work on Congressional oversight in 1984 and it hasn't been improved upon in the intervening years (although Aderbach's Keeping the Watchful Eye from 1990 expands upon it). If this paragraph has thus far caused your eyes to glaze, I promise this is more interesting than it sounds.

Congress is constantly delegating authority to various Federal agencies – the EPA, Securities and Exchange Commission, FDA, etc. – and one of the fundamental questions of politics is how (or if) Congress can control them after handing over the keys. Staffed largely by unelected (and un-fire-able) civil servants, the agencies are something of a leviathan and Congress can very quickly lose control of policy. Traditionally it was thought that oversight required Congress to hover over the agencies and crack the whip when they deviate from their mission. Yet there is no evidence that this happened, so it was widely assumed that Congressional oversight was limited at best.

McCubbins and Schwartz relied on a very old concept – classic Madisonian pluralism – to solve the puzzle. Their analogy, not to mention the title of the paper, is "Fire alarms vs. police patrols." The police engage in costly hands-on oversight. They cruise around looking for crimes being committed and, provided the offender is black or Latino, they chase after them yelling, "Stop, evildoer!" This is time- and labor-intensive. It costs a lot of money. But preventing crime is judged to be worth the cost. The fire department operates much differently. They don't cruise around looking for fires. They are organized to respond quickly, but only when someone says "Hey, there's a fire!" In this scenario, you and I are effectively the regulators.

This idea was intended to describe how Congress monitors regulatory agencies, but it has come to accurately describe the behavior of regulators themselves. This is partly by design – Reagan-era ideas about "getting government off our backs" – and partly of financial necessity. The public and interest groups become the regulators, sounding the "fire alarm" when necessary. It's not always a great system. The Food & Drug Administration (or the FAA, or OSHA, or whatever) has nowhere near enough people to do police patrols, actively seeking out safety violations. So they respond to fire alarms, i.e. a few dozen people get e.coli, someone loses an arm in a kick press, or a plane goes down. Both the regulatory agencies and the Congress that ostensibly monitors them are designed to react, not to prevent. Neither the political will nor the resources to engage in preventative regulation exist.

OK. Now the point.

Mike draws our attention to an old Baseline Scenario piece on the House GOP version of financial reform, which is relevant because what is about to come out of the Senate is really, really similar:

…creates an Office of Consumer Protection within the [Financial Institutions Regulator]. The Office of Consumer protection is responsible for all consumer protection rulemaking under the Consumer Credit Protection Act, and will coordinate with the other divisions of the FIR in enforcing consumer protection. Establishes a consumer complaint hotline for the timely referral and remedy of consumer complaints, regardless of charter type or regulatory structure. Requires the Office of Consumer Protection to use extensive consumer testing prior to the promulgation of new consumer protections. Requires a comprehensive review of consumer protection rules and regulations on a regular basis with reports to be issued to Congress based on inaction or action with regards to consumer protection standards.

So the GOP idea of regulation is a hotline, a phone in the basement at Treasury. We wait until something devastating happens and then we spring into action…by calling this number and saying "Hey, something devastating happened!" well after the opportunity to do anything meaningful has passed. N.B. the cute language about "testing" regulations and doing a periodic review so Congress has a regular opportunity to cut whatever the banks are complaining about.

It is entirely understandable that Congress oversees regulatory agencies in this manner. Their time is finite and the demands for their attention are many. For the agencies themselves, however, this is demonstrably the worst possible way to regulate. It gives us little more than good autopsies; the role of Federal agencies is to show up after the fact and explain the disaster they failed to prevent. So what we are getting in terms of financial reform (and I defer the nuts/bolts to Mike) is a regulatory body that will be empowered to do little except write a nice, detailed 9/11 Commission Report for the next crash. If we can't regulate derivatives I guess that's the next best thing, right?


  • fuzzbuzz215 says:

    You're spot on, as usual. The regulatory structure in this country is just as ineffective as the the Republican Party which is ironic since it is the GOP that took all the teeth out of regulation anyway. Hail Ronald Reagan. But, where are the dick jokes?

  • displaced Capitalist says:

    Ha! ok, Ed. I'll comment.

    I guess I'm actually cool with this solution. From my perspective a hotline is better than what we've got now which is nothing. If a cc company screws us over, unless we're well-connected, we have no remedy for the transgression.

    Now, if the agency is powerless to act on complaints, then there is a real problem…

    Of course, I still would like to see CC companies face the consequences of making bad business decisions. Right now, if a company issues a CC to an effing DOG and the dog's owner goes on a spending spree, their solution is to sue the owner. WTF? I thought one principle of capitalism was taking responsibility for your actions, caveat emptor and all that nonsense?

  • All regulation now follows the Reagan Republican template: the Feds are empowered to clean up the mess afterwards, but in the meantime they are now allowed to get in the way of a healthy profit. The country is effectively run on the principle of lemon socialism: privatize the benefits, but nationalize the losses.

    The fact that a Democratic majority in the Senate cannot do better than Reagan models of governance suggests that they have lost the ideological battle. A Democratic President and/or Congress is no more than a caretaker government for Reagan/Thatcher era neo-liberalism. The personnel have changed temporarily, but the rules of the game have remained the same. I'm looking forward to an even bigger bailout in ten years.

  • This laissez-faire approach must be a fairly easy sell to the witless, though–since most catastrophes, minor and major, are the result of human error/malfeasance, and since any system put into place would only be triggered when/if such error/malfeasance occurred, why not simply wait for the error/malfeasance. In other words, you can make all the rules you want, but since even oversight can't do anything *until* something starts to go wrong, in the same way that a ref can't call foul until said foul has been made, why not save the cost and catch the mistake/criminal after the fact? (Ignore the dead bodies in the wake of such events–you don't know them, and they were costing you money, anyway.)

    And of course, if the mistake/criminal is big enough–like, oh, say, the use of sub-primes as party favors at all the Wall Street shindigs–then you can really save some dough, since there can't be any redress, since the people who fucked up/broke the law are 'too vital to be punished.' In other words, what are you gonna do when it's the fire department that's committing arson?

  • Pan Sapiens says:

    Well, Mike is right. Regulation of derivatives is not properly addressed. Considering derivatives can do as much as a half a quadrillion (!) dollars of damage to us, yeah it's a problem. Call in a comet strike while we are at it.

    This is a surprise to you?

    Republicans are do-nothing spineless whiny little cocksuckers that pretty much gave up on governing during the 80s, as reflected in the "let's just get on with business as usual because you can see everything is just peachy in the business world" version of the financial reform bill.

    This is a surprise to you?

    You want me to get pissed? I'm already pissed. Otherwise… you phoned this one in.

    Fish. Barrel. Shotgun.

  • fuzzbuzz215 says:

    The simplest problem with laissez- faire is not that it is unjust or harmful to poor people, but that it is a hopelessly inadequate description of any system of liberty, including free markets. Markets and wealth depends on government . – Cass Sunstein

  • J. – "In other words, what are you gonna do when it's the fire department that's committing arson?"

    Kill Scott Glenn.

  • Based on my experience with NHTSA, the regulatory agencies are the most skeptical, unhelpful fire departments imaginable. You say your house is on fire? Well, first you need to prove that there is, in fact, a fire. Next, you need to show us that you did not start it. Finally, if you show us that the fire was started with a defective heater, well we can't really help you there, and we certainly could not provide you with information regarding the other 1,000 heater fires we have been told about. Better luck next time.

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